Alumina in focus Supply, Demand and Pricing 2015 Metal Bulletin B&A Conference Simon Storesund, SVP Commercial, B&A 26 February 2015 (1)
Cautionary note Certain statements included within this announcement contain forward-looking information, including, without limitation, those relating to (a) forecasts, projections and estimates, (b) statements of management s plans, objectives and strategies for Hydro, such as planned expansions, investments or other projects, (c) targeted production volumes and costs, capacities or rates, startup costs, cost reductions and profit objectives, (d) various expectations about future developments in Hydro s markets, particularly prices, supply and demand and competition, (e) results of operations, (f) margins, (g) growth rates, (h) risk management, as well as (i) statements preceded by expected, scheduled, targeted, planned, proposed, intended or similar statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, these forward-looking statements are based on a number of assumptions and forecasts that, by their nature, involve risk and uncertainty. Various factors could cause our actual results to differ materially from those projected in a forward-looking statement or affect the extent to which a particular projection is realized. Factors that could cause these differences include, but are not limited to: our continued ability to reposition and restructure our upstream and downstream aluminium business; changes in availability and cost of energy and raw materials; global supply and demand for aluminium and aluminium products; world economic growth, including rates of inflation and industrial production; changes in the relative value of currencies and the value of commodity contracts; trends in Hydro s key markets and competition; and legislative, regulatory and political factors. No assurance can be given that such expectations will prove to have been correct. Hydro disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. (2)
Healthy demand growth outlook for primary aluminium Strong demand drivers in key aluminium segments Transport Construction Growth in vehicle production Aluminium content in cars increasing Growth in other transport modes Urbanization Housing market recovery in mature regions Energy neutral buildings Global primary demand estimates Million tonnes 4-6% annual growth 54 69 37 6.5% Electrical Urbanization Substitution from copper China 27 Machinery & equipment Packaging Following growth of industrial production Urbanization Environmental friendly solutions World ex-china 27 32 3.5% 2014 E 2019 E Source: CRU, Hydro Analysis (3)
World ex. China primary aluminium supply & demand million mt 40 35 30 25 20 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Current & creep Under construction Probable & possible Net China imports Demand Source: CRU (4)
Chinese primary aluminium cost curve Some 60% of the industry assumed unprofitable on a cash basis USD/t 2 800 2 600 2 400 2 200 2 000 Q4 2014 aluminium price, Changjiang spot, ex VAT 1 800 1 600 1 400 1 200 1 000 Other Carbon Energy Alumina 800 600 400 200 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Share of total production (%) Source: CM Group (5)
China alumina cost curve The industry appears to be currently cash positive, however not expected to cover cost of capital USD/t 400 350 300 250 Dec-14 Jun-14 Alumina price CMAAX excl. VAT 200 150 100 Other Energy Caustic Bauxite 50 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Share of total production (%) Source: CM Group (6)
China - alumina production & capacity utilisation Shandong the World s swing producer? Capacity Production Capacity Production Capacity utilisation rate million mt 80 Capacity utilisation rate 100% million mt 25 100% 70 60 80% 20 90% 50 60% 15 40 80% 30 40% 10 20 10 20% 5 70% 0 0% 0 60% Source: CM Group. Note Q4 production annualized (7)
Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 China developing new bauxite import sources Indonesia ban translating to higher prices average CIF China Import volume by origin, million tons «Value in use» increasing more 80 USD/t 80 70 60 Change 2014 vs 2011: Indonesia -27.3 Australia +7.2 India + 4.5 Other Pacific +3.5 Atlantic +3.3 75 70 Avr CIF China Value in Use 50 65 40 60 30 55 20 50 10 45-2011 2012 2013 2014 40 Indonesia Australia India Other Pacific Atlantic Source: China Customs, CMgroup, Hydro (8)
Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 RoW price lower RoW price higher China balancing the ROW alumina market Monthly annualized import, mio tons 9 8 7 6 5 4 3 2 1 Arbitrage USD/t 40 30 20 10 0-10 -20 China is expected to respond to ROW alumina price changes by adjusting imported volume. The pivot point will balance around Chinese cost of producing alumina. Over time, increased bauxite prices to Chinese refineries could move the pivot point upwards. 0-30 Annualized import Arbitrage Source: China Customs, Platts, Hydro (9)
Shandong cost vs PAX Australia Might be a key price factor USD/mt 450 PAX fob Australia (USD/mt) Shandong province alumina production cost (ex VAT USD/mt) Shandong province alumina capacity utilisation rate (%) 100% 400 350 300 90% 80% 70% 60% 250 50% Source: Platts, CM Group (10)
World ex-china alumina cost curve has shifted down Site cost USD/mt 500 450 400 350 2014 cost 2015 cost PAX 18 Feb 2015, 336 USD/t fob Australia 300 250 200 150 100 50 0 0 10 20 30 40 50 60 million mt Source: CRU (11)
Currency & commodity movements Shifting cost curve downwards 20% 15% 10% USD appreciation against currencies of major alumina producing countries USD appreciation from 2013 to January 2015 Chinese domestic coal price trends similar to international seaborne traded prices USD/t 140 120 100 5% 80 60 0% -5% China Brazil Australia 40 2011 2012 2013 2014 ARA fob (6'000kc NAR) Shanxi Dantong FOR (5'500kc NAR) Source: Bloomberg, IHS McCloskey (12)
World ex. China alumina supply / demand balance million mt 80 75 70 65 Committed: Ma aden Anrak Nhan Co (Vietnam) Kendawangan (Indonesia) Probable: Shaheen (UAE) Aditya (India) CPI Boffa (Guinea) Chico Boke (Guinea) 60 55 50 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Current-creep Committed Probable Demand including exports to China (4 million mt pa) Source: CRU (13)
Alumina pricing on own fundamentals Hydro Index / spot price exposure 100% Alcoa API/Spot pricing as a % of third-party shipments (based on official reporting) 68% 75% 84% 55% 28% 37% 5% 2015e 2017e 2020e 2010 2011 2012 2013 2014 2015e 2016e Internal demand LME linked sales Index exposure Source: Hydro, Alcoa Q4 14 Earnings Presentation (14)
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Number of transactions per week Alumina price fob Bunbury (USD/t) Hydro committed to Index pricing 4 3 2 1 Number of transactions per week CRU Alumina Price Index (API) 355 345 335 325 315 305 Platts reported trades 2013 and 2014 Average 2 per week 2013: 76 2014: 109 Hydro reporting every trade Strict in house control mechanisms Provide liquidity to the market 0 295 285 Responsibility for all players to report every single trade Source: CRU (15)
Hydro The largest aluminium player in Brazil Strong position with very high quality bauxite Alunorte Capacity: 6.3 million tonnes 92% Hydro ownership MRN Capacity: 18 million tonnes 5% Hydro ownership 40% offtake agreement Albras* Capacity: 460 000 tonnes 51% Hydro ownership CAP Project Capacity: 1.9 million tonnes 81% Hydro ownership Paragominas Capacity: 9.9 million tonnes 100% financial exposure Expansion possibility to 15 million tonnes Bauxite Alumina Aluminium * Included in Primary Metals business area (16)
CAP alumina refinery project a very competitive project Utilize large bauxite reserves in Paragominas Competitive investment cost and cost position Utilizing existing pipeline capacity Full review of technical solutions to further reduce cost and increase efficiency Ready to proceed as soon as new capacity is needed in the market First phase: 1.86 million tons per annum (17)
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